FAMILY BUSINESS: HOW TO RESOLVE DISPUTES

Family businesses are not without their difficulties. In the event of a disagreement, it’s often difficult to keep personal feelings and business opinions separate. Below, we look at the issues inherent in family business disputes and how to resolve them.

TYPICAL PROBLEMS WITH FAMILY RUN BUSINESSES

In any business, there will be differences of opinion at board level but differences of opinion in family-run businesses can sometimes blur between business and personal. That is not to say all family run businesses are run like Ewing Oil (for the Dallas fan) but it is wise to map out how the decision-making process should unfold.

Quite often in family-run businesses, the parents may have set the business up and children may be coming through to take over the reins. This is not to say the children will have equal involvement or even enter the business at the same time. These variable dynamics can sometimes lead to heightened challenges for the decision-making process.

Problems at board level could arise due to the competing interests of the owners. For example, more senior shareholders may be less willing to take risks as they near the end of their working years and newer members may push for business risk to grow the business in a different direction.

THE VALUE OF SHAREHOLDERS’ AGREEMENTS

Shareholders’ agreements can cover everything from voting rights, rules on share transfers to long-term business objectives. When you’re in business with family members, shareholders’ agreements are particularly useful. It is far easier to avoid disputes later down the line if everyone understands their respective rights and responsibilities at the time they take shares in a Company.

FAMILY OR COMMERCIAL ADVICE; WHICH IS NEEDED?

When setting up a family run business or granting shares to a new family member, the starting point will be to discuss the process with a solicitor specialising in company commercial law. It may also mean that private client and taxation advice is needed but a company solicitor will be able to identify these issues in the first meeting. For example, a senior, majority shareholder may want to consider IHT planning for their children and may also need to put in place a business lasting power of attorney to ensure their role as a director can be executed by another if they are unable to do so themselves.

When disagreements arise in a family business, if the parties do not know how to resolve the dispute, the company solicitor who advised on the shareholders’ agreement should be the first point of contact as they can explain the relevant provisions and how the parties should act.

A well-drafted shareholders’ agreement may include an agreed process for resolving disputes and in extreme cases, a right to take shares back from a shareholder or director who is in material breach of the agreement.

ADDRESS PROBLEMS EARLY

We have seen some unfortunate cases where a director or shareholder loses interest or fails to contribute to the same level as other members of the family business but continues to receive the same income and the same share of profits. Where this is not addressed it is inevitable that it will lead to unrest between the family members/shareholders.

It is never too late to put in place a shareholders’ agreement, but it will be harder to enforce terms on someone who doesn’t want to change the level of their contributions. This is why agreements should be put in place at the earliest opportunity and not as an afterthought.

WHAT HAPPENS IF A DISPUTE CAN’T BE RESOLVED?

If an impasse is reached and a key decision cannot be made, the parties to the dispute may consider forms of alternative dispute resolution, rather than court proceedings. Mediation provides for the parties to the dispute to meet with when a neutral third party mediator to air any issues and see if there is a way to reach a compromise.

Benefits of mediation include:

A forum where everyone can be open and honest about their feelings without prejudicing their position in open court proceedings;

The guidance of an experienced mediator who will promote resolution whilst keeping negotiations calm and rational;

It is usually a cheaper option and less protracted;

You may discover there are deep-rooted reasons for the conflict which have nothing to do with the business.

Most importantly, once the dispute is resolved or a compromise is reached, it may be a good time to document the outcome and update a shareholders’ agreement at the point of agreement. This should help to avoid similar disputes rearing their ugly heads again.

At AMD Solicitors, our team of solicitors in Bristol have extensive experience in advising family-owned businesses. For more information, simply call our team on 0117 973 3989 or fill out our contact form and we will get back to you as soon as we can.

This article is provided for general information purposes only and represents our understanding of the relevant law and practice as at the date of uploading. This article should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.

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